On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (often abbreviated OBBBA) into law as H.R. 1, marking one of the most significant changes to the U.S. tax code in years. The law permanently extends many of the tax cuts originally enacted under the 2017 Tax Cuts and Jobs Act, which were scheduled to expire at the end of 2025, including lower individual tax rates and a nearly doubled standard deduction. In addition, the bill introduces a series of new tax provisions that are designed to benefit workers and families — such as targeted deductions for tips, overtime pay, senior taxpayers, and other incentives — while also making other parts of federal fiscal policy more expansive.
One of the most attention‑grabbing features of the law is a temporary deduction for tip income and overtime pay. Under this provision, workers in occupations that “customarily and regularly receive tips” may deduct up to $25,000 of qualified tip income from their federal taxable income for tax years 2025 through 2028. Tips continue to be reported as income and remain subject to payroll taxes (like Social Security and Medicare), but the deduction can significantly reduce the amount of federal income tax owed. A similar deduction applies to qualified overtime compensation, allowing up to $12,500 ($25,000 for joint filers) to be subtracted from taxable income during the same period. These deductions phase out for higher earners.
The “no tax on tips” provision targets occupations where tipping is customary, such as restaurant servers, bartenders, hospitality staff, personal care professionals, and more, with the Treasury and IRS responsible for detailing qualifying jobs. The deduction doesn’t exempt tips from all taxes: workers must still report their tips and pay payroll (FICA) taxes. It also doesn’t apply to automatic service charges or mandatory gratuities added by employers. The law specifies a cap and income‑based phaseout, meaning the full benefit is limited to those below certain income thresholds. This structure aims to provide meaningful relief to service workers without broadly transforming how all earned income is taxed.
Beyond tips and overtime, the legislation includes a series of other notable changes. It increases the standard deduction further, expands the estate tax exclusion amount, and offers a new senior deduction, allowing older taxpayers additional reductions in taxable income. The bill also expands deductions for employer‑provided childcare, boosts credits for small businesses, and enacts temporary deductions for auto loan interest on U.S.‑assembled vehicles. These measures are structured to provide tax relief across multiple demographic groups but are often temporary and set to expire after 2028 unless extended by Congress.
While proponents tout the legislation as historic tax relief for working and middle‑income Americans — with claims of increased take‑home pay and stronger consumer spending — critics raise concerns about fiscal responsibility. Because the bill extends and adds substantial tax breaks, federal revenue is projected to decrease significantly, contributing to long‑term budget deficits unless offset by spending cuts or future revenue increases. Observers also note that many provisions are temporary, and the law makes only selective changes while leaving other systemic issues untouched — highlighting ongoing debates about tax fairness and the balance between targeted relief and broader economic policy.
For workers in service industries, the tip deduction is already being implemented for the 2025 tax year, with guidance from the IRS and Treasury clarifying how to claim these benefits when filing tax returns. Employers and payroll systems are adjusting to distinguish “qualified tips” and overtime pay for reporting purposes, though many reporting forms remain unchanged for 2025, with additional changes expected in 2026. The practical effect for many workers will be larger tax refunds or lower tax bills, especially for those with substantial tip or overtime income up to the deduction caps. However, the true economic effects — on income distribution, consumer demand, and federal revenues — will become clearer over several years of data and analysis.
